SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-27267
I/OMAGIC CORPORATION
(Exact name of registrant as specified in its charter)
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Nevada |
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88-0290623 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
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1300 Wakeham |
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92705 |
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(Address of principal executive offices) |
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(Zip code) |
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(714) 953-3000 |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act: |
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(None) |
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Securities registered pursuant to Section 12(g) of the Act: |
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Common Stock, par value $.001 per share |
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Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicated by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ý
Registrant’s net sales for its fiscal year ended December 31, 2001, were $67,788,959. As of April 8, 2002, Registrant had 67,930,291 shares of its $.001 par value Common Stock issued and outstanding with an aggregate market value of the common stock held by non-affiliates of $9,421,647. This calculation is based upon the closing sales price of $0.78 per share on April 5, 2002.
Documents Incorporated By Reference. None
TABLE OF CONTENTS
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This report and the Company’s consolidated financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to the Company’s future economic performance and its current beliefs regarding revenues it might earn if it was successful in implementing its business strategies. The Company does not undertake to update, revise or correct any forward-looking statements.
The information contained in this document is not a complete description of the Company’s business or the risks associated with an investment in the Company’s common stock. Before deciding to buy or maintain a position in the Company’s common stock, prospective investors should carefully review and consider the various disclosures made in this report, and in other materials filed with the Securities and Exchange Commission (“SEC”) that discuss the Company’s business in greater detail and that disclose various risks, uncertainties and other factors that may affect the Company’s business, results of operations or financial condition.
Any of the factors described above or in the “Risk Factors” section below could cause the Company’s financial results, including the Company’s net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of the Company’s common stock to fluctuate substantially.
Corporate Overview
I/OMagic Corporation, a Nevada corporation (the “Company”), was formed on October 20, 1992 under the name Silvercrest Industries, Inc. In March 1996 the Company acquired all of the outstanding shares of common stock of I/OMagic Corporation, a California corporation (“I/OMagic California”), in exchange for shares of the Company’s common stock. I/OMagic California was incorporated in 1993 and since its incorporation has been engaged in providing computer peripheral upgrades and consumer electronic products. Prior to the acquisition of I/OMagic California, the Company had no activity. Subsequent to this acquisition, the Company changed its name to I/OMagic Corporation.
On December 31, 2000 the Company acquired all of the outstanding common stock of IOM Holdings, Inc., a Nevada corporation (“IOM Holdings”), in exchange for shares of the Company’s common stock. In March 2000, IOM Holdings acquired some of the assets of Hi-Val, Inc., including the Hi-Val brand name. Hi-Val was a direct competitor of the Company in the optical storage and media markets. IOM Holdings obtained the exclusive international license for the Digital Research Technologies brandname. Through the acquisition of IOM Holdings, the Company obtained the exclusive and sole worldwide rights to the “Digital Research Technologies” brand name. Digital Research Technologies was a competitor in input-output products such as monitors and keyboards. The Company completed the general assignment of Hi-Val’s assets and the foreclosure upon the Digital Research Technologies assets primarily to acquire an interest in nationally recognized brandnames which had been previously sold through large retail customers.
Consequently, the Company develops, sub-contract manufactures, markets and distributes optical storage devices, multimedia products, input-output peripheral products and digital entertainment solutions for desktop, mobile computing and consumer electronics markets. The Company markets these products through some or all of the Company’s brand names: I/OMagic, Hi-Val and Digital Research Technologies.
Business Profile
The Company has expanded its product offerings and distribution channels through development of the I/OMagic brand name and the recent acquisition/license of the Hi-Val and Digital Research Technologies brand names. The Hi-Val and Digital Research Technologies brand names have increased the Company’s market presence and penetration. The Company has expended significant resources in building brand awareness and acquiring strategic brand names. The Company redesigned, in conjunction with its two core manufacturers, the technologies and products
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marketed under these brand names. The integration of these brand names proved extremely costly during the fourth quarter of 2000 and the first half of 2001, producing severe operating losses.
The Company maintains Internet web sites at www.iomagic.com, www.hival.com, and www.dr-tech.com. The purpose of these web sites is to provide technical support for customers with installation or other similar product questions and to support its brand recognition efforts through this increasingly important electronic media. The Company is aware that its customers frequently sell the Company’s products over their e-commerce based web sites and the Company’s agreements with its retail customers do not provide any restriction upon this practice.
Two of the Company’s major shareholders, Behavioral Technology Corporation (“BTC”) and Citrine Corporation (“Citrine”), an investment arm of Ritek Corporation, manufacture a majority of the Company’s optical storage drive and media products. The Company has strategically selected these two manufacturers to participate as shareholders in the Company and play a key role in manufacturing the Company’s products and assist in supporting the Company’s growth needs. Additionally, these manufacturers expend substantial sums in research and development of new computer peripheral products and optical storage media formats that the Company markets.
The Company’s products are divided into four strategic categories: optical storage products, multimedia products, input-output peripheral products and digital entertainment products. The Company markets these four product categories through some or all of its three brand names: I/OMagic, Hi-Val and Digital Research Technologies. The Company’s customers include: Best Buy, CompUSA, Circuit City, Future Shop of Canada, Micro Center Super Stores, Office Depot, Office Max and other leading retailers throughout the United States. These products are very susceptible to product obsolescence and typically exhibit a high degree of volatility of shipment volumes over relatively short product life cycles. The timing of introductions of new products in one calendar quarter as opposed to an adjacent quarter can materially affect the relative sales volumes in those quarters. In addition, product releases by competitors and accompanying pricing actions can materially and adversely affect the Company’s revenues and gross margins.
The Company frequently grants limited price protection on unsold inventory. Moreover, certain of the Company’s retail customers will readily accept returned products from their own retail customers, and these returned products are, in turn, returned to the Company for credit.
In the fourth quarter of 2001, the Company commenced shipping its first digital entertainment product, a portable MP3 player distributed under the name MyMP3. The Company has recently filed a trademark application for the name MyMP3.
The Company sells its products to retail customers such as mass merchandisers and large chains who sell products primarily off-the-shelf directly to end users. Reliance on indirect channels of distribution means that the Company typically has little or no direc t visibility into end user customer demand. The Company must rely upon sales forecasts provided by its retail customers in order to comply with lead times required by these customers. If these forecasts prove inaccurate, the Company could either have excess inventory (resulting in potential finance costs and obsolescence) or insufficient inventory (resulting in an inability to meet customer demands promptly). Accordingly, this means that future operating results are dependent on the Company accurately predicting in advance the demand for various product segments from its customers.
The Company is not the licensee or owner of any of the technology comprising its products. As a result, the Company does not have a proprietary interest in any of the software, hardware or related technology comprising its various products. The Company relies primarily on trademark protection for its I/OMagic, Hi-Val and Digital Research Technologies brand names. There can be no assurance that the Company’s measures to protect its proprietary rights will deter or prevent unauthorized use of the Company’s brands. In addition, the laws of certain foreign countries may not protect the Company’s proprietary rights to the same extent, as do the laws of the United States or the European Community.
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Strategy
The Company’s strategy is to continue to strengthen its three brands through North American retail outlets. The Company plans to utilize its core manufacturers to develop a wide assortment of peripheral upgrade solutions to enhance the PC and consumer electronics marketplace. The Company believes that the expansion of its peripheral upgrade products will improve the value of the Company’s three brand names. The Company’s 2002 objectives include: focusing the I/OMagic, Hi-Val and Digital Research Technologies brand names into specific product categories, increasing penetration and shelf-space with the Company’s current customer base of large national retail chains and strengthening its information technology systems infrastructure to provide better customer delivery and support at lower operating costs.
The Company intends to continue distributing its optical storage drives and media, such as CD-ROM, CDRW and DVD players, under all three brand names. During 2002 the Company intends to commence differentiating the brands marketing each brand into different product categories. Specifically, multimedia products such as audio and video adaptor cards, video capture cards, and optical storage and media will be marketed under all three brands. Input-output products such as floppy disk drives, keyboards, mice and modems will be marketed under the Hi-Val brand name. The Company anticipates that its input-output products will include wireless solutions, as well as the more traditional wire connected products. Digital Research Technologies will include digital entertainment products, such as the Company’s recently introduced MyMP3 portable music player.
With the increasing evolution of multimedia, digital entertainment and wireless connectivity capabilities into PC products and peripherals, the Company intends to monitor technology developments and end-user demands and to develop, market and distribute products to meet this demand. As technology evolves, product life-cycles are increasingly shortened, requiring careful forecasting and financial and inventory controls (See “Industry Risk Factors”). The Company has developed vendor relationships, expanded its customer base and improved its information technology infrastructure to meet these business pressures.
Industry Overview
The development of high performance PCs and servers and the evolution of the Internet infrastructure have increased the demand for greater capabilities in the storage, manipulation, transfer and management of digital data. Digital computing and processing have extended beyond traditional computer systems, such as PCs and servers, to include a wide array of networking and communications, consumer electronics and industrial applications, including routers, switches, digital cameras, digital video recorders, MP3 digital audio players, embedded controls and medical instruments. The need for improved functionality has led to a greater demand for peripheral products which improve the capabilities of computer systems.
The markets for the Company’s products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and rapid product obsolescence. Product life cycles in the Company’s markets frequently range from three to twelve months. Success in this market is substantially dependent upon the ability to continue to develop and introduce competitive products and technologies on a timely basis with features and functions that meet changing customer requirements in a cost-effective manner. Further, if successful in the development and market introduction of new products, the market still requires proper forecasting of customer demand for such new products so as to avoid either excessive unsold inventory or excessive unfilled orders related to the products. The task of forecasting such customer demand is unusually difficult for new products, for which there is little sales history, and for indirect channels, where the Company’s customers are not the final end customers. Moreover, whenever the Company launches new products, it must also successfully manage the corollary obsolescence and price erosion of those of its older products that are impacted by such new products, as well as any resulting price protection charges and stock rotations from its distribution channels.
According to NPD Intellect, a leading providing of on-line market data, in its year 2001 market research, the United States market for retail sales of all computer products, accessories and peripherals was approximately $24 billion. The United States retail market for data storage, input devices, multimedia, device connectivity and computer connectivity was $4.15 billion during 2001.
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According to this same source, while total retail sales for all computer products, accessories and peripherals increased from 1999 through 2001 by 5.78%, the Company’s four product categories have grown at a higher rate during this same period.
Principal Products and Services
The Company’s products are divided into four strategic categories: optical storage and media products, multimedia products, input-output peripheral products and digital entertainment solutions. The Company markets these categories through its three brand names: I/OMagic, Hi-Val and Digital Research Technologies. The Company’s customers include most national retail chains marketing the Company’s products, including: Best Buy, CompUSA, Circuit City, Future Shop of Canada, Micro Center Super Stores, Office Depot, Office Max and other leading retailers throughout the United States.
Optical Storage Products
The Company’s optical storage products include CD ROM drives, DVD ROM drives, CD R/W drives and Optical Storage Media for CDR and CD R/W media. These products store and playback digital data, digital imaging, digital video and digital music applications. The DVD ROM is a higher density optical storage device relative to the CD ROM and the CD R/W provides the ability to rewrite data. These products are marketed under the I/OMagic, Hi-Val and Digital Research Technologies brands. According to NPD Intellect’s fourth quarter 2001 market tracking data, the Company’s three brands generated the leading domestic retail sales in the optical storage category.
Approximately 80% of the Company’s gross sales generated during the fiscal year ended December 31, 2001 were generated through the sale of a variety of optical storage products. These products are sold throughout North America to virtually all of the Company’s customers. This category tends to constantly shift toward greater speed and functionality. The Company believes that this shift has historically been created due to consumers constantly searching for the most advanced features and standards available. Additional optical storage products offered by the Company include a full range of optical storage media that complements its optical storage drive business.
The Data Storage market is a growth market and is characterized by rapid change in technology, significant price competition and a variety of competing media formats. Demand for data storage capacity is increasing due to several factors, including an increase in both the number of software applications in use and the amount of data being captured and stored. In-addition, enhanced software capabilities create larger databases, images and music storage that are critical to business, entertainment and consumer applications. This therefore creates an increased need to back-up and store larger amounts of data.
While the optical storage products category generates a substantial portion of the Company’s current revenues, the Company is seeking to expand its revenues and market share by increasing the use of it’s multimedia, input-output peripheral products and digital entertainment solutions. These consumer, entertainment, and business solutions are sold through the Company’s national and regional retail channel customers.
Multimedia Products
Due to the limited resources available to the Company, the Company’s primary focus during fiscal 2001 was to relaunch its two newly acquired brand names through its strongest product offering, optical storage products. Upon successful completion of this effort (currently scheduled for the second half of 2002), the Company plans to commence a full-line of multi-media audio adaptors, ranging from a basic four channel sound card to a full featured 5.1 channel high fidelity (Dolby digital and DTS capable) solution. These audio solutions equip desktop computers with the ability to playback and capture audio streams of data in different formats and fidelities. These devices are also used to download and playback from the Internet music in various formats. Additionally, the Company intends to redesign its video graphics adaptors and TV tuner/capture devices to offer a full range of solutions for the gaming, entertainment and business environments.
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The Company’s multimedia products are offered primarily under the Company’s I/OMagic brand name. Approximately 13% of the Company’s fiscal year end December 31, 2001 gross sales were generated through the sale of a variety of multimedia products, including audio and video peripheral upgrade cards. The Company’s products address specific marketplace demands, including computer games, business applications and other video and audio applications. The Company’s audio product mix provides a range of technologies based upon specifications geared to the specific application. These applications include the basic standard video conferencing application to a full range of audio intensive gaming features. The Company currently offers two video cards and four audio cards.
Input/Output Products
Behavioral Technologies Corporation (“BTC”), a large shareholder and a major supplier of the Company, headquartered in Taiwan, is a leading world-wide manufacturer of various wired and wireless input/output devices. The Company has test marketed a limited number of input/output devices under the Hi-Val brandname through selected national retail channels to determine marketability. As a result of a successful sell-through, the ‘Company intends to develop a full-line of wired and wireless input/output devices, such as mice, keyboards, wireless presentation devices, input/output adaptor cards, floppy disk drives and fax modems. Approximately 2% of the Company’s fiscal year 2001 gross sales were generated through the sale of input/output devices.
Digital Entertainment Products
While the Company’s optical storage products, multimedia products and input/output peripheral products are focused on desktop and mobile computing segments of the market, the Company plans to expand through its Digital Research Technologies brand name into the consumer electronics market with digital entertainment products that include MP3 players, MP3 Juke Boxes and Flat LCD panel television systems.
Approximately 5% of the Company’s gross sales generated for the fiscal year ended December 31, 2001 were generated through the sale of digital entertainment products. This category currently includes only a portable MP3 player distributed under the name “MyMP3,” which commenced distribution in November 2001. The Company intends to focus its efforts in this category due to the convergence of the PC and CE (consumer electronics) distribution channels and the variety of new products the Company is currently evaluating. The Company plans to expand this category in 2002 with the MP3 Jukebox manager, and flat panel TV’s.
Manufacturing and Distribution
Two of the Company’s major shareholders, BTC and Citrine, manufacture a majority of the Company’s optical storage drives and media. The Company has strategically selected these two manufacturers to participate as equity holders in the Company. Each of BTC and Citrine manufactures in excess of 26% and 14%, respectively, of the products of the Company in terms of net sales. The capacity of these manufacturers is well in excess of the current needs of the Company. Sales of products to the Company by BTC and Citrine represent less than 10% of the net revenues reported by each of BTC and Citrine. These manufacturers expend substantial sums in research and development of new computer peripheral products and optical storage media formats. All products distributed by the Company are subject to a minimum warranty of one year to repair or replace the product. This warranty is provided by the manufacturer of the product. BTC and Citrine extend credit to the Company that is subordinated to the Company’s institutional financing.
In addition to these factories, the Company also maintains a subcontract office located in Taipei, Taiwan to identify products and qualify manufacturing facilities, purchase products and coordinate product shipment logistics of these other Asian manufacturing plants. There are approximately ten additional factories from which the Company subcontracts the manufacturing of approximately 60% of its products.
Most of the Company’s products are shipped by its Asian manufacturers to the Company’s facility in Santa Ana, California. These products are then shipped either directly to the customer’s retail location or to centralized distribution centers, where they are then allocated by the customer. These shipments are made through major commercial common carriers. Most product sales are currently conducted through purchase orders placed by large retail customers. While the
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Company has a variety of agreements with a number of these retailers, the Company does not have any long-term agreement which would require that any retailer provide a specified level of orders. These agreements include terms related to pricing and orders, advertising and marketing, returns and rebates, as applicable. These agreements are considered industry standard and are not issued by all retailers.
Sources and Availability of Raw Material and Principal Suppliers
The Company maintains its own retail packaging facility in Santa Ana, California for package assembly and distribution to maximize cost effectiveness. The Company relies on its shareholders’ factories and other third party subcontractors for manufacturing of its products. Typically, the purchase order is the Company’s “agreement” with the manufacturer. Therefore, any of these companies could terminate its relationship with the Company at any time. In the event the Company were to have difficulties with its present manufacturers and suppliers, the Company could experience delays in supplying products to its customers. All of the hardware components contained in the Company’s products are manufactured in Asia. While the vast majority of the Company’s products are assembled and packaged in Asia, certain packaging may be assembled in the Company’s Santa Ana facility or by a Southern California-based subcontractor.
Marketing and Sales
The Company markets its products through three nationally recognized brand names: I/OMagic, Hi-Val and Digital Research Technologies. During the four years ended December 31, 2001, the Company has invested approximately $27 million to build its brand equity in the marketplace. Approximately $18 million was invested in building the I/OMagic, Hi-Val and Digital Research Technologies brands during this four year period, while $9.6 million was booked as an investment to acquire ownership in the Hi-Val brand name and license the Digital Research Technologies brand name. These expenditures have included, but are not limited to, participation in industry trade shows such as Comdex and RetailVision , sales programs, promotional advertisements through national retail outlets, slotting fees which reserve preferential shelf space for the Company’s products and participation in various customer marketing programs and events.
Each of the three brands will continue to be marketed in the Company’s core retail channel: optical storage and media. During 2002 the Company intends to differentiate the Company’s brands by expanding into three product categories: the I/OMagic brand into the multimedia category; the Hi-Val brand into the input/output product category and the Digital Research Technologies brand into the digital entertainment marketplace.
The Company continuously consults with its major retail customers to monitor sales performance for the Company’s products and to identify current and future market trends. Once the Company identifies such a development or trend, the Company consults with its Asian manufacturers to determine the technical feasibility of manufacturing a particular technology. The feasibility is then considered in conjunction with the particular pricing structure which the Company’s customers believe will sell in the retail marketplace.
The Company maintains Internet web sites at www.iomagic.com, www.hival.com, and www.dr-tech.com. The purpose of these web sites is to provide technical support for customers with installation or other similar product questions and to support the Company’s brand recognition efforts through this increasingly important electronic media. The Company is aware that its customers frequently sell the Company’s products over their e-commerce based web sites and the Company’s agreements with its retail customers do not provide any restriction upon this practice.
Competition
In general, there are three key competitive factors which impact upon the success of personal computer peripheral companies: (i) time to market; (ii) product value and technology and (iii) market penetration typically measured by retail “shelf-space” and after sales service.
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Time to Market.
The life cycle of the Company’s products typically range from three to twelve months, with a declining price throughout the cycle. This shortened life cycle requires that the Company maintain efficient supply chain management through inventory controls and quick response to new technology trends. For example, during calendar 2001 the Company transitioned through five product cycles in its optical storage drive category. The Company strategically times its new product introductions by: (a) monitoring technological developments in the marketplace by consulting with its retail customers and (b) defining products jointly with its Asian manufacturers based upon market demands. The Company then places multiple orders each month with its Asian suppliers, thereby assuring that there is a continuous distribution channel comprised of products reflecting trends in the American marketplace.
Product Value and Technology
The Company focuses upon this competitive factor by positioning its products as an affordable alternative to what the market perceives as the “tier one” brands such as Iomega, Yamaha, TDK, Sony, Hewlett Packard and Creative Labs. After the Company launched its three brand strategy in the optical store drive market segment, it rapidly gained the number one market share position in the United States retail channels by the fourth quarter of 2001 (NPD Intellect Fourth Quarter 2001 market data). The Company believes that its approach provides consumers with product value, while still sustaining the technology contained in more expensive brand names. While the Company’s marketplace is clearly extremely price sensitive, the Company has maintained competitive gross profit margins. While there can be no assurance the Company can maintain these margins, it believes that it is well positioned with its shareholder manufacturers to rely upon their combined economics of scale to maintain its margin structure.
Market Penetration and After Sales Service
The Company is in the early stage of implementing its three brand strategy across the North American retail markets. During the third quarter of 2001, the Company launched under all three brand names its optical storage products. During the fourth quarter of 2001, according to NPD Intellect market data, the Company rapidly grew to the largest market share in the United States in CD-Rom and DVD-Rom drives and the number two domestic position behind Hewlett-Packard in CDRW drives. This same source documented that during January 2002 the Company maintained its number one position in the CD-Rom and DVD-Rom categories, while becoming the number one supplier of CDRW drives in domestic retail channels. The Company plans to deploy this three brand strategy during 2002 through its existing retail channels into the multimedia, digital entertainment and input-output peripheral products categories. The Company’s customer base includes approximately 824 Office Depot stores, 995 Office Max stores, 419 Best Buy stores, 626 Circuit City stores, 218 CompUSA stores, 120 Fred Meyer stores and other leading regional retailers. In the aggregate the Company’s customer base exceeds 3,300 retail outlets.
Over the last four years, the Company has invested significant resources in developing brand awareness and creating customer loyalty. Additionally, the Company has invested heavily in building the support infrastructure to conduct its business with the largest national chains of retailers in the country.
As noted above, the Company currently maintains a broad range of peripheral PC upgrade products and digital entertainment solutions.. The Company believes that providing this extensive product mix improves its ability to maintain critical shelf space at its major retail customers.
Competitors for the Company’s hardware products include Acer, Best Data, Buslink, Creative Labs, Hewlett-Packard, Iomega, Phillips, Plextor, Samsung, Sony, TDK and Yamaha. Competitors for the Company’s media products include Fuji, Imation, Maxell, Memorex, PNY, TDK and Verbatim. The Company competes with a number of companies that have greater financial, manufacturing and marketing resources than the Company. The availability of competitive products with superior performance, functionality, ease of use, security or substantially lower prices could adversely affect the Company’s business.
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The market for computer peripherals is extremely price sensitive and competitive. The composition and identity of I/OMagic’s competitors is constantly changing based upon marketplace conditions and changes.
Intellectual Property
The Company owns registered trademarks in the name of I/OMagic Corporation and the Hi-Val brandname. The Company is the owner of the Hi-Val brandname and it is the world-wide exclusive licensee of the Digital Research Technologies trademark. The Company is currently waiting for a final response from the U.S.PTO regarding the transfer of the Hi-Val and Digital Research Technologies trademarks. The Company recently filed a federal trademark application for the name MyMP3. There is no assurance that the Company will eventually secure a trademark in the name of MyMP3. While the Company currently intends to carefully manage and, where appropriate, vigorously enforce its intellectual property rights, there can be no assurance that the steps taken by the Company to protect its technology and enforce its rights will be successful. There can be no assurance that any trademark or other intellectual property right obtained or held by the Company will provide substantial value or protection to the Company, that their validity will not be challenged or that affirmative defenses to infringement will not be asserted.
Due to the rapid technological change that characterizes the Company’s industry, the Company believes that the success of its products will also depend on the technical competence and creative skill of its personnel in addition to legal protections afforded the manufacturers of the technology contained in the Company’s products.
As is typical in the data storage industry, from time to time, the Company has been and may in the future be, notified of claims that it may be infringing certain patents, trademarks and other intellectual property rights of third parties. It is not possible to predict the outcome of such claims and there can be no assurance that such claims will be resolved in the Company’s favor. If one or more of such claims is resolved unfavorably, there can be no assurance that such outcomes will not have a material adverse effect on the Company’s business or financial results. The data storage industry has been characterized by significant litigation relating to infringement of patents and other intellectual property rights. The Company has in the past been engaged in infringement litigation, both as plaintiff and defendant. There can be no assurance that future intellectual property claims will not result in litigation. If infringement were established, the Company could be required to pay substantial damages or be enjoined from manufacturing and selling the infringing product(s). In addition, the costs of engaging in intellectual property litigation may be substantial regardless of outcome and there can be no assurance that the Company will be able to obtain any necessary licenses on satisfactory terms.
The Company does not have any issued or pending patents.
The Company does co-develop jointly with its manufacturers software drivers providing improved connectivity and user-friendliness for end-users of its products. The Company has not historically obtained any intellectual property rights associated with these software drivers.
Research and Development Costs.
Through the Company’s two manufacturer shareholders and its subcontracting office in Taiwan, the Company participates in the development of its products. The Company has traditionally expensed associated costs in its cost of goods sold. In addition, the Company expensed $663,000 in direct research and development expenses during the three year period of time ending December 31, 2001.
The research and development efforts underlying the technology comprising the eventual products sold by the Company are funded by the Company’s manufacturers. Typically, the Company identifies a market or technology trend occurring in the marketplace through consultation with its large retail customers. The Company then provides its Asian manufacturers with the technical specifications or market trends which it has identified. The Asian manufacturers then conduct the actual research and development (in Asia, at their cost) to determine the technical and financial feasibility of the proposed product. The Company does conduct limited research and development in designing driver software providing a user friendly installation, user manual, installation guides, product packaging, marketing literature and market and sales research.
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Employees
As of March 21, 2002, the Company has approximately 89 full-time permanent employees and 20 full-time temporary employees. The Company has no collective bargaining agreements with its employees. The Company believes that its relationship with its employees is good.
ITEM 2 – PROPERTIES OF THE REGISTRANT
The Company maintains its production, receiving, shipping and administrative operations in a leased facility from a related party in Santa Ana, California of approximately 57,374 square feet. This lease expires in March 2010. The Company also leases approximately 22,000 square feet at a facility in Irvine, California, which is used for inventory. The lease expires in May 2002. The Company also leases space of approximately 1200 square feet at a facility in Garden Grove, California on a month-to-month basis.
In August 1999, the Company filed an arbitration proceeding in Orange County, California against its former accountants and auditors, Ernst & Young, LLP, for failure to complete the 1997 audit of the Company in a timely fashion and for excessive billing in connection with the 1997 audit. In January 2002 a ruling was issued determining that the Company owed Ernst & Young $8,000 in fees for the 1997 audit.
On March 9, 2002, the following individuals: Mark Vakili, Mitra Vakili, Hi-Val, Inc., and Alex Properties, filed a Complaint in Orange County Superior Court ( the “Complaint”) naming IOM Holdings, Inc. (“IOMH”), the Company, Steele Su, Tony Shahbaz and Mai Hsu. The Complaint alleges eight causes of action, however, only three claims are asserted against IOMH and the Company.
The three causes of action against IOMH and the Company all relate to an Asset Purchase Agreement executed by IOMH and Hi-Val in June 1999 for the purchase and sale of Hi-Val assets to IOMH. The causes of action are for breach of contract, fraud and negligent misrepresentation. The allegations in the Complaint are that IOMH and other defendants failed to deliver the consideration due under the Asset Purchase Agreement after taking control of Hi-Val. The fraud and negligent misrepresentation claims are based on alleged representations made by IOMH and others to induce Hi-Val and Mark Vakili to enter into the Asset Purchase Agreement. The damages claimed by Plaintiffs in the causes of action are for $27,000,000.00. Punitive damages are claimed on the fraud cause of action.
While the Company believes that it will prevail in the litigation set forth in the Complaint, this litigation is at a very early stage and it is difficult to predict when such litigation will be resolved. The Company intends to vigorously defend this litigation.
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s common stock is currently traded on the NASD’s OTC Bulletin Board under the Symbol “IOMC.” The table below shows for each fiscal quarter indicated the high and low closing bid prices for shares of the Company’s common stock. The below quotations are inter-dealer quotations from market makers of the Company’s stock, without retail markup, markdown, or commission. At certain times the actual closing or opening quotations may not represent actual trades that took place.
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2000 |
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High |
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Low |
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Quarter ended |
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March 31 |
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$ |
4.13 |
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$ |
1.19 |
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June 30 |
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3.38 |
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1.75 |
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September 30 |
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2.94 |
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1.53 |
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December 31 |
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1.81 |
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0.78 |
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2001 |
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Quarter ended |
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March 31 |
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$ |
1.06 |
|
$ |
0.72 |
|
|
|
June 30 |
|
0.88 |
|
0.55 |
||||